2. INCOME TAXES

We file U.S. consolidated federal and state tax returns, as well as consolidated and separate tax filings for non-U.S. jurisdictions. We entered into a Tax Sharing and Indemnification Agreement with Marriott International effective November 21, 2011 (as subsequently amended, the “Tax Sharing and Indemnification Agreement”), which governs the allocation between Marriott International and Marriott Vacations Worldwide of responsibility for federal, state, local and foreign income and other taxes related to taxable periods prior to and subsequent to the Spin-Off. Under this agreement, if any part of the Spin-Off fails to qualify for the tax treatment stated in the ruling Marriott International received from the U.S. Internal Revenue Service (the “IRS”) in connection with the Spin-Off, taxes imposed will be allocated between Marriott International and Marriott Vacations Worldwide as set forth in the agreement, and each will indemnify and hold harmless the other from and against the taxes so allocated. In addition, under the Tax Sharing and Indemnification Agreement, Marriott International is allocated the responsibility for payment of taxes for our taxable income prior to Spin-Off and we are allocated the responsibility for payment of taxes for our taxable income subsequent to Spin-Off.

During 2012, Marriott International completed the valuation of the assets distributed to Marriott Vacations Worldwide at the time of the Spin-Off, which resulted in an increase in our Deferred tax liabilities of $12 million and a corresponding reduction of Additional paid-in capital. Based upon the completed valuations, we re-allocated tax basis among our consolidated subsidiaries and recorded a decrease to our Deferred tax liabilities of $8 million and a corresponding increase to Additional paid-in capital. Further, in 2012 we increased our Deferred tax liabilities by $12 million for adjustments to the Deferred tax liabilities at the time of Spin-Off with a corresponding reduction of Additional paid-in capital.

During 2014, we increased our Deferred tax liabilities by $4 million for adjustments to the Deferred tax liabilities at the time of the Spin-Off with a corresponding reduction to Additional paid-in capital.

The income (loss) before provision for income taxes by geographic region is as follows:


*($ in millions)*	2014		2013		2012
United States	$	179	$	125	$	44
Non-U.S. jurisdictions		(28)		6		(13	)

	$	151	$	131	$	31

Our current tax provision does not reflect the benefits attributable to us for the exercise or vesting of employee share-based awards of $5 million in 2014, $3 million in 2013 and $3 million in 2012.

Our provision for income taxes consists of:


*($ in millions)*	2014		2013		2012
Current – U.S. Federal	$	(43)	$	(37)	$	(61)
– U.S. State		(9)		(5)		(9)
– Non-U.S.		—		(2)		(4)

		(52)		(44)		(74)

Deferred – U.S. Federal		(16)		(5)		43
– U.S. State		1		(1)		6
– Non-U.S.		(3)		(1)		1

		(18)		(7)		50

	$	(70)	$	(51)	$	(24)

The deferred tax assets and related valuation allowances in these Financial Statements have been determined on a separate return basis. The assessment of the valuation allowances requires considerable judgment on the part of management with respect to benefits that could be realized from future taxable income, as well as other positive and negative factors. Valuation allowances are recorded against the deferred tax assets of certain foreign operations for which historical losses, restructuring and impairment charges have been incurred. The change in the valuation allowances established were ($7) million in 2014, $2 million in 2013 and $2 million in 2012.

We have made no provision for U.S. income taxes or additional non-U.S. taxes on the cumulative unremitted earnings of non-U.S. subsidiaries ($151 million at January 2, 2015) because we consider these earnings to be permanently invested. These earnings could become subject to additional taxes if remitted as dividends, loaned to us or a U.S. affiliate or if we sold our interests in the affiliates. We cannot practically estimate the amount of additional taxes that might be payable on the unremitted earnings.

We conduct business in countries that grant “holidays” from income taxes for five to thirty year periods. These holidays expire through 2034. Without these tax “holidays,” we would have incurred the following aggregate additional income taxes: $3 million in 2014, $2 million in 2013 and $3 million in 2012.

We have joined in the Marriott International U.S. federal tax consolidated filing for periods up to the date of the Spin-Off. The IRS has examined Marriott International’s federal income tax returns, and it has settled all issues related to the timeshare business for the tax years through the Spin-Off. Our tax years subsequent to the Spin-Off are subject to examination by relevant tax authorities, and our returns are currently being audited by the IRS and authorities in other foreign jurisdictions. Although we do not anticipate that a significant impact to our unrecognized tax benefit balance will occur during the next fiscal year as a result of these audits, the amount of our liability for unrecognized tax benefits could change as a result of these audits. Pursuant to the Tax Sharing and Indemnification Agreement, Marriott International is liable and shall pay the relevant tax authority for all taxes related to our taxable income prior to the Spin-Off.

Our total unrecognized tax benefit balance that, if recognized, would impact our effective tax rate was $1 million at January 2, 2015 and less than $1 million at January 3, 2014 and December 28, 2012. Our unrecognized tax benefit reflects an increase of $1 million in 2014, an increase of less than $1 million in 2013 and a decrease of $2 million in 2012, representing U.S. activity in 2014 and 2013 and primarily non-U.S. audit activity in 2012.

The following table reconciles our unrecognized tax benefit balance for each year from the beginning of 2012 to the end of 2014:


*($ in millions)*	2014		2013		2012
Unrecognized tax benefit at beginning of year	$	—	$	—	$	2
Change attributable to tax positions taken during a prior period		1		—		—
Decrease attributable to settlements with taxing authorities		—		—		(2	)

Unrecognized tax benefit at end of year	$	1	$	—	$	—

In accordance with our accounting policies, we recognize accrued interest and penalties related to our unrecognized tax benefits as a component of tax expense. Related interest expense and accrued interest expense each totaled less than $1 million in each of 2014, 2013 and 2012.

Deferred Income Taxes

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases, as well as from net operating loss and tax credit carry-forwards. We state those balances at the enacted tax rates we expect will be in effect when we actually pay or recover taxes. Deferred income tax assets represent amounts available to reduce income taxes we will pay on taxable income in future years. We evaluate our ability to realize these future tax deductions and credits by assessing whether we expect to have sufficient future taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies to utilize these future deductions and credits. We establish a valuation allowance when we no longer consider it more likely than not that a deferred tax asset will be realized.

Total deferred tax assets and liabilities at January 2, 2015 and January 3, 2014 were as follows:


*($ in millions)*	At Year-End 2014			At Year-End 2013
Deferred tax assets	$	167		$	153
Deferred tax liabilities		(246)			(213	)

Net deferred tax liability	$	(79	)	$	(60	)

The tax effect of each type of temporary difference and carry-forward that gives rise to a significant portion of our deferred tax assets and liabilities at January 2, 2015 and January 3, 2014 was as follows:


*($ in millions)*	At Year-End 2014			At Year-End 2013
Inventory		(24)		$	(28	)
Reserves		35			26
Property and equipment		(9)			(20	)
Marriott Rewards customer loyalty program		17			15
Deferred sales of vacation ownership interests		(160	)		(109	)
Long lived intangible assets		29			35
Net operating loss carry-forwards		44			50
Other, net		39			28

Deferred tax liability		(29	)		(3	)
Less: Valuation allowance		(50	)		(57	)

Net deferred tax liability	$	(79	)	$	(60	)

At January 2, 2015, we had approximately $201 million of foreign net operating losses (excluding valuation allowances) some of which begin expiring in 2018. However, a significant portion of these tax net operating losses have an indefinite carry forward period. We have no federal net operating losses and net operating losses of $1 million for state tax purposes which begin expiring in 2032.

Reconciliation of U.S. Federal Statutory Income Tax Rate to Actual Income Tax Rate

The following table reconciles the expense related to the U.S. statutory income tax rate to our effective income tax rate:


	2014			2013			2012
U.S. statutory income tax rate expense		35.00	%		35.00	%		35.00	%
U.S. state income taxes, net of U.S. federal tax benefit		2.96			3.48			4.63
Permanent differences⁽¹⁾		0.18			0.24			10.73
Non-U.S. income⁽²⁾		6.27			0.97			7.26
Other items		0.17			(2.28	)		5.41
Change in valuation allowance⁽³⁾		1.79			1.82			17.05

Effective rate expense		46.37	%		39.23	%		80.08	%

⁽¹⁾	For 2014 and 2013, attributed to interest on mandatorily redeemable preferred stock of a consolidated subsidiary. For 2012, attributed to interest on mandatorily redeemable preferred stock of a consolidated subsidiary and foreign income subject to U.S. tax.

⁽²⁾	Attributed to the difference between U.S. and foreign income tax rates, partially offset by the benefit of tax holidays in certain jurisdictions.

⁽³⁾	Attributed to establishment of valuation allowances in foreign jurisdictions for losses that cannot be benefited in the U.S. income tax provision as discussed above.

Cash Taxes Paid

Cash taxes paid in 2014, 2013 and 2012 were $65 million, $29 million and $68 million, respectively.